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How does a bankruptcy like Hostess's affect the economy?

hostess-cupcake

Many major news outlets like The Washington Post and Reuters keep tabs of all the well-known businesses who are currently filing for bankruptcy. Their journalism makes high-profile bankruptcies become hot news items.

One example of this is Hostess's bankruptcy. In 2012, the company received permission in bankruptcy court to liquidate its assets and has since garnered interest from other companies who wish to buy the business. This past weekend, one of Hostess’ creditors - Silver Point Capital - and hedge fund Hurst Capital expressed interest in purchasing Hostess’s snack cake brands (including the famous Twinkie brand). The company has already sold its Wonder Bread and Beefsteak bread brands, to name a few. 

Most Americans learned about Hostess’s bankruptcy almost immediately – and many of us continue to follow with a bit of interest. Why is this? The publicity of the bankruptcy comes partly because Hostess has been a part of many American’s lives since childhood. It is a company with deep American roots and a long-standing presence on grocery stores shelves.

But the other factor is that whenever a company goes out of business, the economy is affected.

 

Sweet and not-so-sweet effects of bankruptcy

Individual and corporate bankruptcies can affect the economy both positively and negatively depending on the scope of the debtor's influence in society. 

In general, bankruptcy has a positive effect on the economy. If a debtor’s debts are discharged, the debtor should (in theory) be able to spend and borrow when they weren't able to before. Over time, you can also rebuild your credit in order to receive loans. These transactions are beneficial for the economy. Someone straddled with debt, on the other hand, cannot contribute to the economy in meaningful ways. The law protects your assets during bankruptcy, so you don’t completely lose your livelihood if you do file.

Individual consumer bankruptcy only has overarching effects if lots and lots of people file. A high number of individual bankruptcies decreases consumer confidence in spending and also decreases the savings rate. 

A corporate bankruptcy, which typically involves a large number of people, can also negatively affect the economy. A company that employs a huge workforce, sustains much of the economy in a given geographic area, and has widely distributed corporate debt will have a major impact on the country’s economy if it goes bankrupt. General Motors, which filed for bankruptcy in 2009, is a good example of this. Thousands of people lost their jobs and the bankruptcy contributed to the general economic downturn. 

When large-scale bankruptcies like this occur, businesses can't pay back their creditors, who in turn have to make up for the loss of money and may end up increasing prices. This influences consumers, who end up paying more for products. 

What about Hostess?

For Hostess, nearly 18,500 workers lost their jobs when the company closes its outlets and bakeries – a large-scale effect on the economy. However, with new companies buying Hostess’s brands, there is potential for the brands to have a rebirth in popularity and success at the hands of new owners. In addition, the vast popularity of the Twinkie and its return could mean a big boost in sales when the snack cake is being manufactured and marketed once once again.

Not every bankruptcy has the same far-reaching effects as Hostess’ does, nor does every bankruptcy experience such publicity. All things considered, bankruptcy is a legal option intended to provide financial relief from debt to struggling citizens. The effects can be both positive and negative, depending on the size of the bankruptcy. Generally, a personal bankruptcy or small business bankruptcy does not affect the economy in the same large-scale ways that a bankruptcy like Hostess’s does. There can still be positive outcomes.

Looking for more interesting articles on bankruptcy? Read about why newspapers rarely announce your personal bankruptcy. 

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